Garden State AG Settles Merrill Market Timing
Charges

March 8, 2005 (PLANSPONSOR.com) - Merrill Lynch has
agreed to pay $10 million and put into place operating
reforms to resolve allegations by New Jersey Attorney General
Peter Harvey that the firm didn't properly supervise New
Jersey financial advisors who market timed mutual
funds.

According to Harvey’s
Web announcement
of the pact, the settlement agreement deals with
allegations that three Fort Lee, New Jersey advisors
allowed hedge fund Millennium Partners to market time
funds. Harvey said Millennium was a prior client of the
three employees and that they continued market timing for
Millennium at Merrill Lynch. Over a third of the trades
involved mutual funds held as sub-accounts of variable
annuity contracts purchased for Millennium, the Garden
State official said.

The three financial advisors, and a fourth who was
involved to a lesser degree, placed 12,457 trades for
Millennium in at least 521 mutual funds and 63 mutual
fund sub-accounts of at least 40 variable annuities,
according to Harvey. Millennium made profits in over
half of the funds and fund sub-accounts. In those funds
where Millennium made profits, its gains totaled about
$60 million, the official said.Reuters reported that Merrill Lynch said it had
fired three financial advisers who market timed and
sanctioned three supervisors over the matter.

“Merrill Lynch failed to reasonably supervise these
financial advisers, whose market timing siphoned
short-term profits out of mutual funds and harmed
long-term investors,” Harvey said in the
announcement. “To resolve these securities issues,
Merrill Lynch has agreed to implement reforms to enhance
supervision of its financial advisers, particularly in
the area of annuities, where trading in annuity
sub-accounts has been done under the radar, without
records. This is an industry-wide issue, and the
recordkeeping and supervision requirements in this
agreement should set a new standard.”

Compliance Reforms

In addition to the fine, Merrill and its affiliate
Merrill Lynch Insurance Group Inc. committed in
the settlement agreement
to implement new procedures to maintain the required
“book and record” under New Jersey and federal securities
laws – records of all client reallocation requests made
through a Merrill Lynch employee that involve mutual
funds held as sub-accounts of variable annuity products
of outside insurance carriers. Neither firm recorded
those requests in the past. Harvey said in the statement
that by properly treating such transactions as subject to
the requirement that financial advisers record every
request by a client for a trade of a security, Merrill
Lynch will be able to give such transactions proper
oversight, Harvey said.

More generally, Harvey said, Merrill Lynch
will put into place a new policy and procedure addressing
how advisors should deal with instructions from clients
to trade mutual funds in accounts held outside of Merrill
Lynch. Merrill Lynch also will issue a global compliance
alert to all of its financial advisors, supervisors and
compliance personnel reinforcing its policies and
procedures mandating retention and review of
correspondence with clients.

Merrill Lynch said in a statement it resolved
regulatory inquiries of New Jersey, Connecticut and
the New York Stock Exchange (NYSE) into activities of
financial advisors in connection with the short-term
trading.